Kazuhiko Ishikawa, certified pension actuary at Mizuho Trust & Banking, believes a new hybrid retirement plan scheme will be embraced by most Japanese companies over the coming years.
As of April this year, the government has allowed companies to provide cash balance plans to fund employees' retirement. So far there have not been any takers, but this silence will prove short-lived.
Cash balanced plans are meant to complement existing defined benefit plans, of which there are two categories, as well as the nascent defined contribution schemes. A lot of growth in cash balanced plans will come slowly over the next decade as one type of DB programme, the tax-qualified pension plan (TQPP), is phased out. More immediately, asset sizes in the other DB type of plan, the employee pension fund (EPF), are expected to shift to cash balance as these restructure to boost returns and reduce liabilities, says Ishikawa, who spoke at a recent conference in Tokyo.
Under cash balance plans, each employee has a separate account (like in DC) and each month a percentage of salary is credited to it. But there is no contribution from the company, and the plan accumulates based on worker contributions and the interest earned from those assets. Moreover, retirees receiving payments in an annuity upon retirement will benefit from having their remaining assets in the plan continuing to receive interest.
Interest rates can be fixed or based on government bond yields.
These plans are being implemented because now virtually all of corporate Japan faces an acute underfunding crisis among existing DB schemes. Companies are eager to shift the burden for savings and investment on workers. But DC schemes are seen as too complicated, requiring employees to make investment decisions they may not understand.
Ishikawa notes that companies wishing to scrap their current DB plans still need the consent of employees, but cash balance plans are likely to prove more popular because they are easier to understand, and unlike the existing DB schemes, workers can count on receiving their due. And unlike DC plans, the company remains responsible for investing the contributions.
Cash balance plans will also benefit those workers who change jobs before retirement. They will not have to sacrifice a DB plan that only provides significant benefits to people who have served the same company throughout their career - an important point as labour habits loosen in Japan. Unfortunately, however, the tax preferential treatment under DC plans is not extended to cash balance plans when workers change jobs, putting a crimp on their portability. "This is a big future challenge," says Ishikawa.